1H17 core earnings of RM9.2m came in below our expectation, at 39% on weaker margins in 2Q17. 1H17 dividend of 1.18 sen is also below at 40%. We expect TOMYPAK to grow by 89% up to 36,000MT p.a. by FY20-21. We lower earnings by 12-10% to RM20.9-26.6m in FY17-18E on lower margins. Maintain MARKET PERFORM but lower TP to RM0.92 upon lowering earnings, based on an unchanged Fwd. PER 19.2x on FY18E FD EPS of 4.8 sen.

1H17 core net profit of RM9.2m is below our expectation, achieving 39% of our FY17 estimate. No consensus available. Topline is within at 46%, but we believe 2Q17 was an exceptionally weak quarter, on higher raw material cost and product mix, which affected margins. 2Q17 dividend of 0.8 sen was declared while total 1H17 dividend of RM4.9m implies 1.18 sen which is also below our estimate (40% of our estimate of 2.9 sen) post accounting for the enlarged share base post the share split and bonus issue which was completed on 2nd June 17. 1H17 dividend pay-out represent a 47% pay-out ratio vs. our expectations of 50%.

Results Highlights. QoQ, topline was down by 3% due to lower demand from overseas customers this quarter, while margin was also affected, down 4.5ppt on higher raw material cost. All in, CNP was down by 57% after excluding RM1.3m unrealised gain. YoY-Ytd, topline was down by 2% due to similar reasons mentioned above, on the back of flattish EBIT margins, dragged down by a weaker 2Q17. However, CNP margins were up slightly (+0.6ppt), increasing CNP by 6% due to lower effective tax rates from the reinvestment allowance.

Outlook. TOMYPAK plans to increase capacity by 89% up to 36,000MT p.a. by FY20-21 (from 19,000MT p.a. currently) by constructing a new plant in Senai. Phase 1 of the capacity expansion will come on-stream from 2H17 to 1H18, while Phase 2 and 3 will see capacity growing gradually from FY19 up till FY20-21. As such, we expect revenue to grow by 1-23% in FY17-18E, while historical revenue growth has been rather flattish at 2.4% to -1.5% in FY15-16.

Lower earnings by 12-10% in FY17-18E to RM20.9-26.6m (from 23.8- 29.4m) mostly on higher raw material cost (+6%), which include resin, and ink cost, while we expect product margins to improve in coming quarters on better export sales. All in, we lower net margins to 8.9-9.3% (from 10.2-10.2%). We still expect strong earnings growth in FY17-18E of 9.9-27.5% driven by the group’s bullish capacity expansion plans, backed by improving EBIT margins, lower effective tax rates (12-13% in FY17-18E, vs. 21% in FY16) from Reinvestment Tax Allowance (RA), and riding off a weaker FY16 due to higher operating cost and the absence of the RA.

Maintain MARKET PERFORM but we lower our fully diluted TP to RM0.92 (from RM1.00) based on a lower FY18E FD EPS of 4.8 sen (from 5.3 sen) upon lowering earnings and an unchanged Fwd. PER 19.2x, which is slightly below SLP (20.5x Fwd. PER) and SCGM (19.9x Fwd. PER) as they are both faring better than TOMYPAK in terms of margins, earnings growth and ROEs. We like TOMYPAK for its: (i) reputable client base, (ii) resilient demand in the F&B industry, (iii) bullish expansion plans of 89% up to FY20-21, (iv) effective turnaround and management since FY14, and (v) being a beneficiary of a strengthening USD. However, based on our fully diluted Target Price of RM0.92, we believe TOMYPAK is fairly valued warranting a MARKET PERFORM call.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand, (iii) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 28 Aug 2017